The Council on Wage and Price Stability steeped into the fray over commodity options trading yesterday, opposing ban on such trading and urging rapid implementation of domestic options trading on exchanges.
The council's report takes the opposite view from that expressed by the General Accounting Office, House Appropriations Committee investigators and many congressmen during recent hearings on the reauthorization of the Commodity Future Trading Commission.
In the wake of the scandals surrounding London commodity options sales in the United States, Congress and the GAO favor banning options sales altogether until the CFTC is better able to regulate that market.
The CFTC has proposed suspending commodity options trading until it can implement its proposed pilot program of domestic options trading on exchanges. But Congress wants the domestic program to be postponed indefinitely.
The council, which monitors inflation for the White House, said an options ban would be an "extreme measure" that would penalize firms and individuals unfairly.
"The council is aware of the recent, well-publicized scandals connected with the sale of commodity options, and understands the problems the commission has had in attempting to eliminate abuses," the report states.
"We feel, however, that the extreme measure proposed by the commission is not an appropriate solution to the problem. An outright ban on options trading would result in a loss of the (economic) benefits which options can provide, and would unfairly penalize those firms and individuals who have not been responsible for any abuses," it continues.
The council urged the CFTC to accelerate implementation of its pilot program on organized exchanges.
The council stress that options serve an important economic function. "Like insurance, the use of options can reduce, in real terms, the costs of bearing risks assoicated with the production and distribution process. These savings are eventually passed on to consumers in the form of lower prices," the report states.
The market also provides hints about price trends, the council argues: "An ongoing option market can provide important information on the expected important variability of the price of the underlying commodity. Such information is important to producers and others in formulating their plans."
The conclusions of the council's study have been known within the CFTC for several weeks, but have not halted its plans to suspend options sales.
CFTC sources acknowledged that the options suspension has become a "political" issue. "After (the publicity about) Lloyd, Carter (& Co.), the congressional pressure to stop options sales totally ballooned," one staffer said. "We know it's going to hurt a lot of people who are honest and a lot of customers who hold options, but if we don't suspend options, Congress will."